Why is the crypto market down today?

Bitcoin (BTC) price is struggling to hold on to a marginal 0.23% gain on October 20, but overall crypto prices are falling across the board and the broader market is still in a strong downtrend. Bitcoin price continues to trade below $20,000, a level that many investors believe is a psychologically significant support and resistance level.

Concern over the US Federal Reserve’s “lack of progress” in curbing high inflation is the likely cause of the prolonged malaise seen in crypto prices. On October 20, Philadelphia Federal Reserve President Patrick Harker suggested that higher interest rates have not been effective in curbing inflation, concluding that “we’re going to keep raising interest rates for a while.”

Many analysts believe the Fed’s aggressive rate hikes represent another policy mistake — the first is waiting too long to address rising inflation — and that 2023 will see the onset of a deep recession.

September’s consumer price index (CPI) showed that consumer prices rose by 0.4%. Compared to a year ago, consumer prices are now 8.2% higher, according to data from the Bureau of Labor Statistics.

In addition to a 0.4% rise in consumer prices, the core CPI rose by 0.6% month-on-month since September and by 6.6% over the past 12 months, when food and energy prices are removed.

In short, rising inflation is the absolute last thing the Federal Reserve wants to see. The Fed’s rate hikes are meant to cool the economy and put a damper on high inflation, so the higher-than-expected October 13 report is likely to translate into another round of 0.75 basis points in the coming months.

Given the high correlation between the crypto and stock markets, Bitcoin’s price action tends to follow the direction of the S&P 500 and the Dow, and a series of economic events occurring in mid-October may continue to push crypto prices.

The following dates highlight key financial events that have a history of influencing investor sentiment in the crypto market:

• October 17 – end of month: Q3 earnings
• 28 October: Price index for personal consumption expenditure (PCE).

This week, a number of major US companies are reporting quarterly results, and the mixed results are causing volatility in stock markets. Tesla ( TSLA ) shares fell 6.2% after missing its third-quarter earnings target, with the electric vehicle maker citing production and supply challenges.

In addition to these upcoming events, the strength of the US dollar and what appears to be a serious escalation in the conflict between Ukraine and Russia continue to weigh on all markets.

Let’s take a deeper look at three reasons why crypto prices will continue to fall in 2022.

Federal Reserve rate hikes

Raising interest rates increases the cost of borrowing money for consumers and businesses. This has a knock-on effect of increasing the business’ operating costs, the cost of goods and services, production costs, wages and ultimately the cost of almost everything.

High inflation that cannot be suppressed is the main reason why the US central bank raises interest rates. And since the rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.

When monetary policy or metrics that measure the strength of the economy change, risk assets tend to signal, or move, earlier than stocks. In 2021, the Fed began to signal its plans to eventually raise interest rates, and data shows that the Bitcoin price has corrected sharply by December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what lay ahead for the stock markets.

If inflation begins to slow, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risk assets such as Bitcoin and altcoins could once again become the “canaries in the coal mine” by reflecting the return of risk-on investor sentiment.

The persistent threat of regulation

The cryptocurrency industry and regulators have a long history of not getting along, either due to various misconceptions or mistrust of the actual use of digital assets. Without a functioning framework for regulating the crypto sector, different countries and states have a plethora of conflicting guidelines on how cryptocurrencies are classified as assets and exactly what constitutes a legitimate payment system.

The lack of clarity on this issue is weighing on growth and innovation within the sector, and many analysts believe mainstreaming of cryptocurrencies cannot happen until a more universally agreed and understood set of laws is enacted.

Risk assets are heavily influenced by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, at worst, an outright ban continues to affect crypto prices on an almost monthly basis.

Fraud and Ponzier triggered liquidations and repeated blows to investor confidence

Fraud, Ponzi schemes, and sharp market volatility have also played a significant role in crypto prices crashing through 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry, and the market being relatively small compared to the stock markets.

The implosion of Terra’s LUNA and Celsius networks as well as the abuse of influence and client funds by Three Arrows Capital (3AC) were each responsible for subsequent blows to asset prices in the crypto market. Bitcoin is currently the largest asset by market cap in the sector, and historically, altcoin prices tend to follow whatever direction the BTC price goes.

As the Terra and LUNA ecosystem collapsed in on itself, the Bitcoin price corrected sharply due to multiple liquidations occurring in Terra – and investor sentiment plummeted.

The same thing happened on an even larger scale when Voyager, 3AC and Celsius collapsed, wiping out tens of billions in investor and protocol funds.

Related: Here’s What Could Trigger a ‘Major BTC Rally’ As Bitcoin Clings To $19K

What to expect for the rest of 2022 to 2023

The factors affecting falling prices in the crypto market are driven by Federal Reserve policy, meaning the Fed’s power to raise, pause, or lower prices will continue to have a direct impact on Bitcoin, ETH, and altcoin prices.

In the meantime, investors’ risk appetite is likely to remain subdued, and potential crypto traders may consider waiting for signs that US inflation has peaked and that the Federal Reserve is beginning to use language indicative of a policy pivot.